Paul Millus Authors “The Evolving Joint Employer Concept and the NLRB” for the NYSBA’s Labor and Employment Law Journal

Whether an employer is subject to joint employer liability depends on many factors. Relevant questions abound, such as does the case deal with a parent-subsidiary relationship, a purported independent contractor situation, a contractor/subcontracting relationship, two separate companies with common management, or a franchisor/franchisee relationship? Then, one must decide which factors are relevant to reach a conclusion on the question of whether a joint employer relationship exists in any one of those scenarios. Add to the mix the many types of cases where a court would need to determine whether joint employment is present, such as in breach of contract, Fair labor Standards Act (“FLSA”), Title VII or under the National Labor Relations Act (the “Act”), and it is abundantly clear that this area of law is complex, and the issue is of significant importance to employers as well as employees. For example, being designated a joint employer under the Act can mean the putative employer is subject to unfair labor charges and open that employer to being included in a representative election and the unionization of its work force.

The National Labor Relations Board (the “Board”) is acting as the tip of the spear to promote a more expansive way to evaluate whether an employer is indeed a joint employer. The impact of the Board’s efforts goes far beyond the typical labor law dispute under the Act and may eventually redefine the employer-employee relationship in other areas of the law. This evolution is in its early states, but if the Board is ultimately successful in achieving its goal, employers will have a new set of obligations that they never thought would be imposed on them vis a vis workers they never viewed as employees.

What is a “Joint Employer”- A Brief Overview

The joint employer doctrine’s history is not as long as might be thought. The first time the U.S. Supreme Court even used the words “joint employer” was in 1941 in an NLRB case.[i] The first Second Circuit case to use the term in an employment case was in 1962.[ii] It was 1953 when the New York State Supreme Court first examined a joint employment issue in connection with a decision by the Workman’s Compensation Board.[iii]

One of the first statutes to impact the joint employer analysis was the Labor Management Relations Act of 1947 (“LMRA”), better known as the Taft-Hartley Act, which specifically excluded “independent contractors” from the LMRA to ensure that the Board and the courts apply general agency principles when distinguishing between employees and independent contractors. Invariably, in such cases courts have looked to traditionally employed common-law agency concepts in joint employment cases where courts looked to the amount of control the putative employer has over the worker.[iv] However, in 1961, in an FLSA case, the Supreme Court held that an entity which suffers or permits an individual to work may, as a matter of “economic reality,” function as the individual’s employer. In rendering his opinion, Justice Douglas made it clear that his view was “‘economic reality’ rather than ‘technical concepts’ is to be the test of employment.”[v]

From that case, the “economic reality test” was born. After some refinement by the courts, the “economic reality” test came to include inquiries into: “whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.”[vi] In FLSA matters, it has long been recognized that no one of the four factors standing alone is dispositive, and that the “economic reality” test encompasses a “totality of circumstances” approach so that any relevant evidence may be examined so as “to avoid having the test confined to a narrow legalistic definition”[vii]

In 2003, the Second Circuit enunciated a revised test to determine whether an employer is a joint employer in an FLSA case involving subcontracting. Those factors are (1) whether the putative employer’s premises and equipment were used for the plaintiffs’ work; (2) whether the company which was then immediate employer had a business that could or did shift as a unit from one putative joint employer to another; (3) the extent to which plaintiffs performed a discrete line-job that was integral to the putative employer’s process of production; (4) whether responsibility under the contracts could pass from one subcontractor to another without material changes; (5) the degree to which the putative employer or their agents supervised plaintiffs’ work; and (6) whether plaintiffs worked exclusively or predominantly for the putative employer.[viii]

Where independent contractor status is at issue in an FLSA matter, the identity of the worker’s employer is also relevant. In such cases, the Second Circuit has applied a different and more expansive test where it examines: (1) the degree of control exercised by the employer over the workers, (2) the workers’ opportunity for profit or loss and their investment in the business, (3) the degree of skill and independent initiative required to perform the work, (4) the permanence or duration of the working relationship, and (5) the extent to which the work is an integral part of the employer’s business.[ix]

In the Title VII context, the Second Circuit has stated that the appropriate test under Title VII for determining when parent companies may be considered the employer of a subsidiary’s employee is a four-part test developed by the Board analyzing the (1) interrelation of operations; (2) centralized control of labor operations; (3) common management; and (4) common ownership or financial control with the focus on “centralized control of labor relations.”[x] From these examples, it is clear that the courts have continued to outline partial bright-line tests to provide as much guidance as they can on the issue.

As far as the Board is concerned, since 1984, a pair of rulings by the NLRB originally set the standard for what constituted a joint employer for purposes of enforcement of the Act. In Laerco Transportation and TLI, Inc., the Regional Director was determined to have correctly ruled that joint-employer status is established when there is “a showing that the employer meaningfully affects matters relating to the employment relationship such as hiring, firing, discipline, supervision, and direction.”[xi] That ruling was later interpreted by the Board to require “direct and immediate” control by the putative employer over employment matters.[xii]

There is no question that courts have been guided by Board and its decisions in connection with joint employment issues and applied those concepts to other cases when joint employment is at issue. Unquestionably, what the Board does today will influence the courts, not merely in terms of their approach to appeals from Board decisions, but also in other joint employer cases.

As for the Board itself, the definition of what is a joint employer is significant. As stated, it affects collective bargaining because, instead of allowing for larger collective bargaining units with the power of numbers behind it, a more narrow definition of a joint-employer limits opportunities for unionization as potential members are splintered among hundreds of small companies. Likewise, as the Board is charged with investigating and prosecuting unfair labor practices under the Act, employers who believed they had no involvement with certain terms and conditions of employment are suddenly and potentially liable for violations. Accordingly, what the Board does on this issue is poised to have far reaching implications.

The Board’s Gambit: Browning Ferris and the McDonald’s Cases

In the case of BFI Industries of California, Inc. and FRR-II, LLC d/b/a Leadpoint Business Services and Local 350, International Brotherhood of Teamsters, the Board considered whether it should adopt a different standard for what constitutes a joint employer in the context of a subcontracting case. Petitioner, Local 350, International Brotherhood of Teamsters (“Local 350”) sought to represent all full time and regular part-time employees jointly employed by FRR-II, LLC d/b/a Leadpoint Business Services (“Leadpoint”), a temporary staffing agency, and BFI Industries of California, Inc. (“BFI”) the client to whom Leadpoint supplies employees. The Regional Director rejected Local 350’s claim that Leadpoint and BFI were joint employers. On appeal, the sole issue before the Board was whether BFI jointly employs Leadpoint’s workers.[xiii]

Local 350 argued that, while the facts support a finding that the employers are joint-employers even under the present standard, the Board should adopt a broader standard to effectuate the purposes of the Act and to conform with prior case law and “industrial realities.” Local 350 maintained that “requires the Board to consider not merely the indicia of control exerted over the employees by each employing entity, but also the relationship, and the extent of control as between the two employing entities,” which, it concludes, “requires consideration of indirect control.” From Local 350’s standpoint, the Board’s narrow view of employment “makes even less sense in our current economy” where “the modern worker is awash in a sea of multi-layered and dependent

BFI’s opposition was based on the argument that the joint-employer standard proposed was, in reality, no standard at all and thus fails to satisfy due process. BFI posited that the “standard” argued by the Union and the General Counsel provided no guidance for businesses about how they can structure their business operations to provide certainty that they are, or are not, joint employers under the Act. Using its own version of the “industrial realities” standard, BFI and Leadpoint pointed out that business relationships typically involve agreements that indirectly, but necessarily, impact the terms and conditions of employment. They argued that service contracts often involve significant control by the customer over the service provider and, when services are performed on the customer’s property, the amount of control is even greater. Moreover, BFI argued that the standard proposed by Local 350 would violate the Act by failing to give ordinary meaning to the term “employee,” namely, “an employment relationship does not exist unless the worker is directly supervised by the putative employer” citing to Supreme Court precedent. Finally, BFI argued that adoption of the new standard would violate the Taft Hartly Act of 1947 which directed the Board to apply common law agency principles, which the employer argued, require “a showing that the employer meaningfully affects matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction.”

On August 27, 2015, by a 3-2 margin, the Board issued its decision citing that “the diversity of workplace arrangements in today’s economy has significantly expanded” pointing at the growth in the temporary help services industry from 1.1 million workers in 1990 to 2.87 million workers in August of 2014.[xiv] The Board noted that past decisions narrowed the joint employer definition and enunciated that the Board will follow a common law agency test the Board argued was supported by the Supreme Court’s decision in Boire v. Greyhound.[xv] The Board stated “the Board may find that two or more entities are joint employers of a single workforce if they are both employers within the meaning of the common law, and if they share or co-determine those matters governing the essential terms and conditions of employment.” The Board also noted that it will no longer require that a joint employer not only possess the authority to control employee’s terms and conditions of employment but also must exercise that authority and do so directly, immediately, and not in a “limited and routine manner” thus overruling Laerco and TLI as well as several other prior Board decisions. Under this new test, if the employer can “[r]eserve[] authority to control terms and conditions of employment, even if not exercised,” indirect control, even through an intermediary, would suffice to establish a joint employer relationship.

What followed was an election in which the union prevailed with the Board certifying the union as the collective bargaining representative of those employees. Browning-Ferris then refused the union’s request to bargain resulting in an unfair labor practice charge alleging that Browning-Ferris’s refusal to bargain was unlawful. On January 12, 2016, the Board found that BFI and Leadpoint, as joint employers, had violated the Act. On February 26, 2016, BFI appealed to the District of Columbia Court of Appeals. In its “Statement of Issues to be Raised” Browning-Ferris contends that the Board’s new joint employer standard is defective for several reasons, to wit: (i) it is contrary to the definition of “employee” established by Congress in the 1947 Taft-Hartley amendments; (ii) improperly relies on a “economic realities” standard; ( which was prohibited by Congress in the 1947 Taft-Hartley amendments; (iv) fails to promote stable collective bargaining relationships as required by the Acts; and (v) it is arbitrary and capricious because it is “hopelessly vague.”

Turning its attention to the joint employer concept in connection with franchising, in July 2014, the NLRB’s general counsel authorized the filing of consolidated complaints against multiple McDonald’s franchisees and their franchisor, McDonald’s USA LLC (“McDonald’s”), as joint employers. On December 19, 2014, the Regional Directors from six Regions issued Complaints or Consolidated Complaints based on charges that a multitude of its franchisees were joint employers under the Act. Those Complaints involved allegations made in 61 separate unfair labor practice charges filed between November 28, 2012 and September 22, 2014 which involve 21 separate and distinct Independent Franchisees and a single McDonald’s-owned restaurant. The NLRB has alleged 181 unrelated alleged violations against McDonald’s occurring at 30 separate restaurants, each with its own ownership, management, supervision and employees, located in five states and spanning the entire continental United States.[xvi]

Then, on December 19, 2015, the NLRB’s General Counsel commenced litigation alleging that McDonald’s USA and its franchisees violated the rights of employees working at McDonald’s restaurants around the country by, inter alia, “making statements and taking actions against them for engaging in activities aimed at improving their wages and working conditions, including participating in nationwide fast food worker protests about their terms and conditions of employment.”[xvii] The Board’s General Counsel transferred the cases from 5 Regions to the Regional Director for Region 2, here in New York on January 5, 2015, and the following day the Regional Director for Region 2 consolidated the transferred cases with previously consolidated cases from Region 2 for a hearing.

In the McDonald’s case, the focus is on franchising and the “economic realities” attendant to that business relationship. As a result, McDonald’s (and its individual franchisees) must defend these 61 unfair labor practice charges involving spanning the 31 franchisees from 30 different locations in one proceeding.

On March 9, 2016, in his opening statement at the hearing, the NLRB’s counsel argued that McDonald’s uses business consultants–who monitor staffing and business practices and conduct periodic reviews of implementation of those practices–to exert control over its franchisees. Pointing to McDonald’s operating manual and point-of-sale and scheduling systems, the NLRB has concluded that franchisees’ actual control over the terms and conditions of their workers’ employment is limited. Reinforcing his view that the true puppet master is McDonald’s, the NLRB counsel argued that McDonald’s sets the times in which a burger should be served, the job classifications of workers, and sets a uniform computer scheduling system across the restaurants, concluding that McDonald’s co-determines the working conditions of franchisees’ employees making it a joint employer under the NLA. The hearing continues with 7 requests by McDonald’s to obtain special permission to appeal the Administrative Law Judge’s procedural rulings in connection with subpoenas served by both sides including a severance motion filed by McDonald’s arguing that the joint employer allegations alone could not justify consolidation where the unlawful conduct alleged in each charge is separate and distinct, involving individual restaurants, separate actors and wholly unrelated entities. McDonald’s posited that the defenses to the joint employer allegations as well as the underlying unfair labor practice charges will invariably vary from case to case. Thus far, the motion practice has not found favor with the Administrative Law Judge or the Board.[xviii]

McDonald’s counter argument is that it is essentially doing its due diligence as a franchisor. It further stated that the company does not tell business owners whom to hire or when to schedule its employees. Rather, McDonald’s counsel maintained that McDonald’s exerts the level of control that any franchisor would expect to maintain a uniform customer experience across all franchisees, adding, “[a]ll franchisors, if they’re successful, do precisely the same thing.”

At this point, the NLRB’s general counsel has not outlined in detail the specifics supporting his view that McDonald’s USA should be deemed a joint employer. However, assuming a consistent approach to this case as was applied in Browning-Ferris, the impact of what the Administrative Law Judge and, eventually, what the Board decides cannot be understated. In addition to holding franchisors liable for unfair labor practices committed by franchisee owners across the country, the franchisors may be responsible for Workers’

While far from settled, it is clear that the courts, as they are prone to do, were predisposed to identifying narrow factors which would make the question of joint employment easier to determine. Courts often attempt to establish tests by which the evidence can be measured with some precision resulting in a predictable outcome. Predictability can serve the courts and litigants well. If anything can be drawn from the Board’s decision in Browning-Ferris and its stated goal of finding McDonald’s to be a joint employer, it is the Board eschews formulaic approach to the issue. Rather, almost any aspect of the relationship between the putative employer and the worker is fair game for argument that joint employment exists. In Browning-Ferris, while rejecting the dissent’s position that the Board is reverting to an “economic reality test” rejected by the Supreme Court and Congress, the majority’s commentary on the “diversity of workplace arrangements in today’s economy” and its citation to statistics concerning the growth of the temporary help industry over the last two decades, seem to support the dissenters’ view regarding the Board’s motivation. Nevertheless, the Board’s approach will most certainly make it easier for workers to maintain viable cases (if not win them outright) where they allege joint employment. Where such cases, in the past, might have been ripe for dismissal, they now may have new, longer and more fruitful lives.

Moreover, there is no reason to think that the impact will be relegated merely to parties before the Board. Indeed, the U.S. Department of Labor issued an “administrator’s interpretation” on January 20, 2016, discussing the distinction between employees and independent contractors under the Fair Labor Standards Act. That guidance emphasized the importance of whether an individual’s services are an integral part of the company’s business and downplayed the importance of whether the business actually controls an individual’s work-sounding very similar to the Board’s approach in Browning-Ferris and likely what it will argue in the McDonald’s case.[i] Also, in a recently discovered draft of an Occupational Safety and Health Administration’s (OSHA) internal memorandum, the OSHA investigators advised that “a joint employer’s standard may apply where the corporate entity exercises direct or indirect control of the work conditions, has the unexercised potential to control working conditions or based on economic realities.”[ii] The Board’s actions in Browning-Ferris and the McDonald’s case foreshadows how the court may view the issue of joint employment in a myriad of other types of cases leaving employers and employees uncertain as to what the future holds.